On the Necessary and Sufficient Conditions for Legitimate Banking Contracts

Journal of Business Ethics 147 (3):669-678 (2018)
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Abstract

What role do demand deposits serve in the financial system? The answer to this simple question has great implications in keeping the legal terms of the contract consistent with the demands of the financial system. Demand deposits are a perfect monetary substitute. Since money is only held to hedge against perceived uncertainty in both the timing and magnitude of future expenditures, demand deposits are demanded for the same reason. From this we derive three main conclusions. First, a financial contract similar to a demand deposit cannot substitute for money. Second, full agreement to a financial contract does not create a perfect substitute for money unless it provides money’s two key characteristics: on demand and par value redemption. Finally, the demand for fractional-reserve demand deposits is fostered by an exogenous source and that demand for a good or service is not a sufficient condition to justify its legality or ethicality.

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References found in this work

Risk, Uncertainty and Profit.Frank Knight - 1921 - University of Chicago Press.
Some ethical dilemmas of modern banking.Philipp Bagus & David Howden - 2013 - Business Ethics, the Environment and Responsibility 22 (3):235-245.
Time deposits, dimensions, and fraud.William Barnett & Walter E. Block - 2008 - Journal of Business Ethics 88 (4):711-716.
Some ethical dilemmas of modern banking.Philipp Bagus & David Howden - 2013 - Business Ethics: A European Review 22 (3):235-245.
The Continuing Continuum Problem of Deposits and Loans.Philipp Bagus & David Howden - 2012 - Journal of Business Ethics 106 (3):295-300.

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